Business owner guide
Key person insurance explained
Some businesses rely heavily on one or two people for revenue, specialist knowledge, leadership or important client relationships. Key person insurance is designed to provide money to the business if an insured key person dies or, where selected, suffers a covered critical illness.
Identifying the risk
A key person is someone whose loss could materially affect the business.
That could be a founder, director, salesperson, technical specialist, senior manager or another employee whose contribution is difficult or expensive to replace.
Revenue
Would sales or client relationships be materially affected?
Profit
Would the person's absence reduce the company's expected profit?
Knowledge
Does the person hold specialist skills or operational knowledge that is hard to replace?
Leadership
Would the business face disruption while recruiting or restructuring?
The question is the financial effect their loss would have on the business, not simply whether they own shares.
The structure
The company normally owns the policy and receives the benefit.
The insured person is the key individual, while the business generally pays the premiums and receives the policy proceeds following a valid claim.
The money can then help the company absorb the financial disruption caused by the insured event. Depending on the identified need, that might include replacing lost profit, recruiting a replacement or supporting cash flow while the business adapts.
If the owner or employee also has dependants who rely on their income, separate personal protection may be needed.
Calculating cover
The sum assured should relate to a measurable business exposure.
There is no single formula that is suitable for every company. The assessment can consider the person's contribution to profits, revenue attributable to them, replacement costs, recruitment time and the period the business may need to recover.
Any lender requirements or other existing business protection should also be considered so that different policies are not confused or duplicated.
It is to estimate the financial loss the business could reasonably experience if that person were suddenly unavailable.
Policy design
Cover should reflect how long the business expects the dependency to exist.
A business may need cover while a founder remains operationally central, while a specialist employee is difficult to replace, or during a period of significant borrowing or growth.
Life cover can be combined with critical illness cover where appropriate, subject to underwriting and policy definitions.
Definitions, exclusions, survival periods and other terms need to be understood before cover is arranged.
Tax treatment
The tax position depends on why the policy was arranged and how it is structured.
HMRC guidance does not provide a blanket rule that all key person premiums are deductible. Whether premiums are allowable for Corporation Tax purposes depends on the facts, including the purpose of the policy and whether it is wholly and exclusively for the purposes of the trade.
HMRC also notes that where premiums are allowable as a trading expense, policy receipts will normally be treated as a trading receipt.
The company's accountant or tax adviser should review the proposed policy purpose, ownership and expected treatment of premiums and proceeds.
Ongoing review
The financial dependency can change quickly.
A fast-growing company may become more dependent on a key salesperson or technical specialist, while a mature business may become less dependent on its founder as management responsibilities are distributed.
Review cover after material changes in profits, turnover, responsibilities, ownership, borrowing or the key person's role.
New insurance may have different premiums, definitions, exclusions or other terms, and equivalent cover may not be available.
Business protection
How dependent is your business on its key people?
We can help identify the financial exposure, estimate the protection need and structure the insurance discussion around the business risk you actually need to cover.
Book a conversationThis guide is for general information only and is not personal protection, tax, accounting or financial advice. Eligibility, premiums, definitions and exclusions depend on underwriting and policy terms. The tax treatment of key person insurance depends on the facts and policy purpose and should be confirmed with the company's accountant or tax adviser. Current HMRC guidance checked on 16 September 2026.